Fund launches and equity raises continued at a fair pace in the third quarter of 2008, but investors may now be holding back until more certainty returns, as Richard Lowe reports

Despite the recent financial and economic uncertainty, private equity real estate funds continued to raise funds in the third quarter of 2008, according to data providers Preqin. Figures show a total of 32 funds reached a final close in the third quarter of 2008, raising an aggregate $30.8bn (€24.6bn).

Although this is a lower number of fund closings than in the third quarter of 2007 (45), a larger volume of capital was raised (only $28bn was raised in the third quarter of 2007). Whether the fourth quarter will be as productive is doubtful, given the growing economic and financial uncertainty gripping the world since September.

In the US, ING Clarion Partners has raised $202m for its latest value-added commingled fund, Clarion Development Ventures III, following support from seven institutional investors, including New York State Teachers Retirement System. The fund aims to invest over three years, tapping market growth once the US economy picks up again.

Federal Capital Partners, meanwhile, has raised $230m for its value-added commingled fund, FCP Fund I, targeting debt and equity real estate investments in the US mid-Atlantic region, including mezzanine investments.

Divco West Properties and LoanCore Capital have come together to form a $2.5bn investment fund that will target real estate debt opportunities at major institutional investors such as the Government of Singapore Investment Corporation (GIC). GIC is understood to be one of its largest investors as it has committed to invest $1bn now followed by a further $500m in January.

The other market seen as being ripe for distressed debt and distressed assets is the UK. RBS Asset Management and Protego Real Estate Investors have joined forces to launch UK debt value fund, aiming to outperform UK direct real estate investment expectations over the medium term and generating a regular income on a quarterly basis.

The real estate arm of the BP Pension Fund, Ropemaker Properties, has teamed up with London-based property company Cube Real Estate to form a £100m (€124m) UK investment fund. Cubemaker Partnership will look to buy cheap commercial property that can be actively managed to increase its value.

Asia continues to attract large amounts of capital, with Merrill Lynch, the investment bank being bought by Bank of America, raising $2.56bn from investors in North America, Europe, the Middle East and Asia for its Asian Real Estate Opportunity Fund. The fund will invest across sectors (including real estate companies) in Japan, China, South Korea, India, Australia and Southeast Asia.

Grosvenor, meanwhile, is expanding its presence in China with the launch of a $600m opportunity fund. The vehicle will invest in shopping centres in both tier-one and secondary cities in the country, aiming to attain returns in the region of 18-20%.
Germany is also continuing to see attention, with Fairvesta Holding issuing its sixth fund, conceived as a blind pool, and to have a volume of €40m to invest in commercial and residential properties. And Hahn Gruppe’s first German Retail Fund closed in September with €125m of commitments and has since acquired two shopping malls, five retail warehouse centres and three superstores, with a letting rate of 100%.

AEW Europe has launched the third in its series of logistics funds. Logistis III will aim to capitalise on the new market conditions, while building up a high-quality warehouse portfolio incorporating sustainable development concerns. The launch of Schroders’ agriculture fund in the summer has since been followed by a comparable vehicle managed by Palmer Capital Partners, intended to invest in farmland across Europe. The fund is targeting €200m of equity and will offer investors an expected annual income return of 5.5%, with total returns in the region of 10-15%, over a 10-year lifespan.

Timber looks to be a growing space for institutional investors. BVK, Germany’s largest pension fund, for example, has awarded its first mandate to invest in the sector, with a view to investing 1% of its €40bn assets.

Catella Real Estate has launched Focus Global Forests, a fund to invest globally in a portfolio of woodlands in eastern Europe, Australia and the US. Jamestown, meanwhile, has launched Timber I, a closed-ended vehicle aiming to invest up to $500m in southern US woodlands.

Today’s fund-raising environment is particularly difficult given current uncertainty. For example, in the autumn it was reported that Cordea Savills had cancelled all fund launches for a year, as well as delaying fund-raising for its new Turkish opportunity fund. The company has since rebutted the former assertion, but CEO Justin O’Connor admits it is unlikely to launch a fund until early 2009 or “until market conditions stabilise”.

He adds: “Current market conditions are clearly not conducive to raising substantial pledges from investors. We could raise funds but the amounts would be much less than if we were to wait a while.”

Schroder Property is banking on 2009 being an important year for raising capital to invest in real estate at lower prices in the UK and elsewhere. William Hill, CEO at the property arm of the UK asset manager, believes that once the current hiatus is over investors will begin making investment decisions and commitments to funds in the first quarter of 2009.

The €9bn Nordrheinische Ärzteversorgung (NAEV), the German pension fund for doctors in the North Rhine region, has not stopped screening potential investment funds, but Hermann Aukamp, managing director, says the pension fund will not invest in a new fund in the first quarter of 2009. “We have deep pockets, but we don’t feel the pressure now to go back into certain markets,” he says.

The West Midlands Metropolitan Authorities, an €11.7bn UK local authority pension fund, on the other hand, could well be investing in the UK again by that time (either directly or through funds), says director of pensions Brian Bailey.
Since September, the pension fund has seen an increasing number of opportunities in the UK market coming to the fore. “Over the next two or three months some more will appear and the opportunities will be such that we will want to take some of them,” says Bailey.